Worthington also looks at the fund’s performance differently. “Our benchmark is the HFRI FOF composite, which we underperformed in 2012. However, we acquired and began managing the fund in June 2009, and have returned 6 percent annually through April 2013, beating our benchmark's return by 3.9 percent.”

He believes that the fund has made adjustments in its exposure to position it well for the rest of 2013. “The increasing volatility trend so far in 2013, which suggests we might be reaching an inflection point in market returns, would benefit our non-correlated exposures,” he says. “We also have added event driven allocations, because corporations are flush with cash, and we expect to see transformative capital structure changes, which our managers will attempt to predict and profit from.”

Worthington points out that Hatteras has tried to curb fees. “We know that fees are important and pricing pressure exists, and since taking over we have added lower-cost shares classes,” he says. “Our institutional class (ALPIX) charges 2.99% and contains most of our assets, which come primarily from fee-only advisors.”

Another product in this space, the Pace Alternative Strategies fund (PASIX), invests with hedge fund managers and changes exposure levels based on their market outlook. “They use internal market assumptions to alter allocation mix, essentially using in-house market timing models, and they haven’t been successful in that effort,” says Morningstar alternative investments analyst Josh Charney. “During the post-2008 recovery they dramatically reduced the funds beta at a really inopportune time.” 

The fund has returned 5.46 percent year-to-date, and delivered 3.75 percent annually over the past three years, lagging the 60/40 compositie on both an absolute and risk-adjusted basis. Pace charges 1.95 percent annually in management fees. Morningstar gives it a “negative” rating.

The Correlation Factor

The Absolute Strategies (ASFAX) fund is viewed more favorably at Morningstar, which has given it a “silver” rating. (Morningstar’s silver rating denotes funds with advantages that outweigh the disadvantages across its five pillars, coupled with sufficient analyst conviction to warrant a positive rating.)

“Absolute Strategies has lower-than-average fees and their performance has been very good,” Haresj says. “They have a lot of conviction in their managers, and turnover and diversification have been lower than their peers.” 

Absolute Strategies charges 2.14 percent, and is up 2.08 percent year-to-date, while averaging 2.13 percent annually over the past three years. Despite the low absolute re-turns, it has bested the 60/40 composite on a risk adjusted basis, earning 1.6 percent in alpha, and adding 1.89 percent of excess return against the hedge fund index. Its 0.04 beta means this fund is truly non-market correlated.

Correlation is a key factor when doing due diligence on these types of funds. “Multialternatives are investing in different strategies but have a long/short equity core, so they have an average .92 correlation with the S&P 500,” Harejs says.

Combining a 92 percent correlation with annual fees that range from 2 percent to more than 3.5 percent is a recipe for mediocrity. Many of these funds are simply too correlated with the market to deliver market beating returns after fees. And as the number of subadvisors increase, the correlations follow.